Barron's Interviews Jeremy Grantham
We do a seven-year forecast every month. On a seven-year forecast, global equities outside the U.S. are boring. They've been so nervous the last year that they mostly reflect the right degree of fear about European problems. Emerging markets and developed markets outside the U.S. are within nickels and dimes of fair value. This is very unusual. We are in the asset-allocation business, and we like to see horrific roller coasters: It gives us something to get our teeth into. What could be more boring than global equity markets at fair value?
About a quarter of the U.S. equity market—the high-quality, boring, great companies—is about fair price, too. The other three quarters are overpriced, and based on our numbers have a slight negative imputed return.
Come back in seven years, and you will not have made a penny, adjusted for inflation, outside the giant brand names, the Microsofts [ticker: MSFT], Apples [AAPL], and so on. So if you add the high-quality brand names to global equities, you have a pretty nice diversified portfolio with a slight high-quality tilt. So you are looking at an almost normal return of 5½% real.
The bond market is a different story. It is manipulated mainly by the Fed to be artificially low, to move the stock market and have a benevolent effect on consumption. Operation Twist [involving the Fed's efforts to lower longer-term interest rates by shifting its portfolio toward lengthier maturities] is a dangerous long-term mistake.
You can push stocks up to get a wealth effect, but we live in a mean-reverting world, and they come back down again when you least need it. It's a pact with the devil. After-inflation and after-tax returns are going backwards, and who benefits? We know the financial system does.
In 2009 and so on, banks couldn't help but make money on the arbitrages involved from zero interest rates and their lending rates, at the expense of the people who would usually invest and use the income. If you could go back and pay pensioners the extra 3% interest, they would have spent all that in the economy.
Who benefits from the banking profits and the banking bonuses? Was there a great capital-spending surge? No. You took money away from people who would have spent it instantly, and gave it to people who have tended to sit on it.
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